Allan Gray is still top

January 31 2011 at 10:01am
By Laura du Preez

Greg da SilvaThe certificate for the second-best management company of 2010 is accepted by Matthew de Wet (left), the head of investments at Nedgroup Collective Investments, and Nic Andrew (centre), the head of Nedgroup Collective Investments. John Kinsley, the managing director of unit trusts at Prudential, accepts the certificate for the third-best management company of last year.

Allan Gray was named the Domestic Management Company of the Year (for 2010) for the third year in a row at this week’s Raging Bull Awards.

The manager also collected a Raging Bull Award for the performance of its foreign equity general fund over three years and two certificates for risk-adjusted performance over five years, one for the foreign equity fund and one for its foreign asset allocation flexible fund. The performance of these rand-denominated foreign funds depends largely on the performance of funds in the Orbis stable – Allan Gray’s offshore sister company.

Orbis was ranked second in the offshore management company rankings, and one of its funds collected a certificate.

But 2010 is a year that Allan Gray is likely to record as one of which the manager is less than proud, because a number of its funds lagged their benchmarks. In Allan Gray’s latest quarterly commentary, Rob Dower, the manager’s chief operating officer, describes 2010 as “an interesting year”.

He says that a year ago Allan Gray decided that the fundamentals of local listed shares did not justify their valuations and that expected future returns would not match those of the previous decade.

Six months ago, the manager warned its investors about the potential consequences should some of the foreign portfolio inflows that have strengthened local markets and the rand be reversed. Based on these views, Allan Gray reduced the equity exposures in its funds.

But, Dower says, “in the past few months the markets have let neither the weak local recovery nor the fickleness of foreign investors bother them at all”.

The JSE ended the year 18 percent up in rands. As a result, Allan Gray funds that are exposed to the equity market have under-performed their peers.

At the end of December last year, the Allan Gray Equity Fund, for example, was ranked second over 10 years, with a return of 22.96 percent a year (according to ProfileData). Over one year, the fund returned 17.11 percent, slightly under-performing the All Share index’s return of 18.98 percent, but the Equity Fund was ranked 70th among more than 100 peers at the end of December last year.

Allan Gray’s Stable Fund remained a top performer over the seven- and 10-year periods (13.61 percent a year) to the end of December last year. Even over five years, the fund was ranked second.

However, relative to its peers, the fund’s performance has fallen over the shorter terms. The Stable Fund was ranked 11th out 48 funds over three years and second last out of 59 funds over one year (4.75 percent return for the year) at the end of December last year.

Dower says the risks that Allan Gray was worried about over the past year have become more worrying, and the potential for capital loss is greater.

Allan Gray funds are invested more to protect investors from losing money than to capture short-term gains from current momentum, he says.

There have been a number of occasions – some of them painfully long – when Orbis and Allan Gray’s stock-picking decisions have caused them to lag the market and their peers, Dower says.

He says the decisions tend to be vindicated over the long run.

The quarterly commentary also contains an article in which Orbis fund managers state that the past 18 months have been challenging for Orbis. Its flagship Global Equity Fund has under-performed its benchmark, the FTSE World index, by 13.7 percentage points over 18 months. This was not enough, however, to dent the longer-term track record of Allan Gray’s Global Equity Feeder Fund or Orbis’s longer-term ranking among offshore fund managers with funds registered in South Africa.

Allan Gray’s longer-term track record is a result of its “valuation-based” investment approach and bottom-up asset allocation.

The manager targets shares that are trading well below what the company believes are their intrinsic value (or the value a prudent businessman would pay for them) and earnings potential. When the prices of these shares return to fair value, the shares can deliver good long-term returns.

As its investment approach includes a margin of safety, Allan Gray’s performance relative to that of other managers is particularly strong during periods characterised by market downturns, such as the severe one of 2008.

Allan Gray is known in the asset management industry as a bottom-up manager – it looks for shares or other securities that are priced below their intrinsic value. When it can no longer find such shares, it allocates to cash (within a fund’s mandate and the constraints of a unit trust category) until the right opportunities arise.

In the PlexCrown Fund Ratings, Allan Gray obtained an overall average score of 4.625 for periods up to five years to the end of December last year. This score was based on the PlexCrown ratings of its indivi-dual funds.

Its other two funds, the Balanced Fund (domestic asset allocation prudential variable equity) and Equity Fund (domestic equity general), each achieved the next highest rating of four PlexCrowns.

As a result, when its PlexCrown ratings in various broad sectors were compared with those of other local managers, Allan Gray was first in foreign equity, joint first in foreign and worldwide flexible, first in domestic fund management and first in foreign fund management.

Second place in the management company of the year rankings went to Nedgroup Investments.

Nedgroup, which has been in second place for three quarters in a row, achieved an overall average PlexCrown rating of 3.875.

Nedgroup outsources the management of its funds to what it describes as the “best of breed” managers, and a number of its funds are managed by successful boutique or small independent managers. One of these managers, Prescient Investment Management, earned Nedgroup a Raging Bull Award for its Bond Fund, which was the top performer among the fixed-interest funds over three years to the end of December 2010.

Nedgroup has 14 funds that qualify for PlexCrown ratings.

The Bond Fund and three domestic equity funds – the Financials Fund, the Growth Fund and the Value Fund – each achieved five PlexCrowns.

Relative to its peers, Nedgroup did particularly well in the domestic fixed-interest sector, where it was placed first.

It was second among the managers on its average score for the management of all domestic funds.

Prudential has been in either second or third position in the management company rankings for all but three quarters over the past four years. It ended the quarter to the end of December in third position, with a rating of 3.792 PlexCrowns.

Prudential is a “prudent value investor” that identifies mis-priced assets, while being very cognisant of the risk that investors are prepared to take. Prudential takes a proactive view on markets, with the aim of out-performing the indices, its competitors and inflation over the longer term.

* Domestic equity (including the general sub-category and all the specialist sub-categories, and the real estate general sub-category);

* Domestic fixed interest (including the bond and income sub-categories);

* Worldwide and foreign asset allocation flexible;

* Foreign equity; and

* Foreign fixed interest.

An overall domestic rating is then calculated using based on the average scores calculated in the domestic sectors on an equal weighting. In order to qualify for a domestic rating, a manager has to have a fund in each of the three domestic sectors listed above.

A manager’s foreign rating is calculated by averaging the ratings of all the manager’s funds listed in the foreign sectors.

A manager has to have at least one fund in the foreign equity general sub-category to qualify for a foreign rating. A manager’s overall rating is calculated by weighting its total domestic rating by 75 percent and its total foreign rating by 25 percent. A manager must have a domestic and a foreign rating to qualify for an overall rating.

This year, as a result of a large number of funds withdrawing their registration with the Financial Services Board, changes were also made to the way in which the offshore manager of the year is determined.

Last year, to qualify as the offshore manager of the year, an offshore fund manager had to have at least one fund with a PlexCrown rating in the global equity general sector and at least one in the global fixed-interest category.

As of the Raging Bull Awards made from 2011, offshore fund managers will qualify for the award if they have:

* At least one fund with a five-year history in either the global equity general or the global asset allocation (flexible and prudential combined) categories;

* A minimum of three qualifying funds under management;

* At least one qualifying fund in four out of the five categories listed below if the management company does not have a qualifying fund in either the global equity general or the global asset allocation (flexible and prudential combined) categories:

* Europe equity;

* USA equity;

* Far East equity;

* UK equity; and/or

* Japan equity.

For more information, visit the PlexCrown website at www.plexcrown.com